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(6) Federal liability is limited to the fund-$25 million authorization, plus reinsurance premiums.

(7) It is on a nonsubsidy basis, that is, it is self-supporting.

At this time, Mr. Chairman, I should like the Assistant Secretary, Mr. Perkins, to review with you some of the charts and the manner pin which the reinsurance program will operate.

Senator PURTELL. We will be very glad to have Mr. Perkins do so. Secretary PERKINS. Before pointing out how the reinsurance applies under S. 3114, it might be well, Mr. Chairman, to consider how reinsurance applies in other types of insurance.

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Taking as an example the life insurance field, we have indicated on this chart (J) how an insurance company might reinsure a substanestial life insurance policy.


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Let us assume that this individual applies to Insurance Company A for a life policy and he pays his premiums to Insurance Company A for a policy of $100,000 face value.

Now, Insurance Company A, not wishing to assume such a large risk, and desiring to spread that risk would, in this instance, pay a part of the premiums that it collected in the form of reinsurance premiums to Insurance Company B, with whom it has arrangements for spreading the risk.

Insurance Company B, we will assume, would agree under the reinsurance contract to absorb one-half of the loss on the death of this individual.

In that case, Insurance Company B would be agreeing to pay $50,000 out of the total of $100,000 face value of the life-insurance policy. That would be the reinsurance payment.


This may be done with life-insurance policies of much less amounts.
It is done in the fire-insurance field and in the title-insurance field.
It is a common principle of spreading the risk by turning over part


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of the original insurance premiums to another company in order that the risks may be shared on a broader basis.

How does that principle apply under S. 3114?

In our next chart (K) we have illustrated the same principle, as it applies in the health insurance field.




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Here we have indicated individuals insured under what we have called health plan X. This is a purely hypothetical plan, that we will assume has comprehensive benefits. We further assume that this insurance company, which is sponsoring plan X, because it has limited experience in the field, decides that it wishes to obtain reinsurance from the Federal reinsurance fund. By paying a reinsurance premi to the Federal reinsurance fund, it would become entitled under the bill to reimbursement in the form of a reinsurance payment of threefourths of the abnormal losses incurred by the company under that particular plan in any year. Hence, if the insurance company spons soring this new comprehensive type of health insurance, plan X, as we called it, has to pay out benefits in any one year which substantially exceed the anticipated amount of the benefits-and I will describe that in more detail-in that case, the Federal reinsurance fund would absorb three-fourths of the abnormal loss. It is to be noted that a reinsurance premium is paid for this privilege just the way it was in our first example of arrangements between two private companies,

Now, one thing to note-as the Secretary pointed out in her testmony-is that there is no relationship between the fund and the ind vidual policyholders, themselves. Under the proposal, the Feder reinsurance fund would be dealing with the carriers and the rel surance contract would be between it and the carrier and it would not be a guaranty of individual benefit payments so far as the purchaser of the insurance is concerned.

It might be helpful to follow the proposed application for reite surance as it would operate under this bill.

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We have in chart L a schematic diagram of the flow of an application for reinsurance. The insurance carriers, as you know, are generally regulated by their own State insurance departments and, generally speaking, they must file their plans and their premium schedules with the insurance departments and make various financial reports. Now, we will assume that this insurance carrier, which is sponsoring plan X, has filed the plan with its State insurance department, has obtained the approval of the State insurance department to sell policies under that plan within the Sate; and is has also gone to other States in which it wishes to do business and has obtained clearance of the plan in those States.

The application for reinsurance, if the insurance carrier decided it wished reinsurance, would then be filed with the Department of Health, Education, and Welfare. Attached to the application would be copies of the policy forms and schedules of the rates, and other supporting details, and acturial data.

That application would be reviewed in the Department of Health, Education, and Welfare, and the Secretary would have to make several determinations. She would have to find that the proposed plan, this plan X, promoted the purposes of the act, that is, that it met the standards prescribed for eligibility for reinsurance.

She would also have to find that there was no comparable reinsurance available from private sources; that is, under the bill, as the Secretary explained, there is a prohibition against the Federal Government's writing reinsurance in areas in which it is available from private sources at comparable terms and rates.

Then, finally, the Secretary would have to find that the carrier was operating in accordance with State law and that it was financially sound and entitled to public confidence; but, as also pointed out in her statement, in making that finding, the maximum utilization would be made of the State insurance department, which in the normal course of

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their affairs makes these types of financial reviews and evaluations of the insurance carriers.


Stopping here, we might go back to chart I and see which of these points we have covered.

It is clear from what you have seen that the program is voluntary for each carrier. That is, it is all initiated by the carrier's own ap plication for reinsurance. If it does not apply for reinsurance, the program has no relationship to that carrier. It is strictly a voluntary proposition for those carriers who wish the privilege of spreading their risks in return for the payment of a reinsurance premium.

We have also observed the second point-that regulation of the carriers remains with the States.

We have seen in the flow of an application that the Secretary would not be interfering with the usual regulatory arrangements between the States and the insurance carriers. That would remain in State hands.

Three: We have seen that reinsurance operates only where comparable reinsurance is not available. That is, the Secretary could not approve this particular plan for reinsurance if at that time it was available from private sources at comparable terms.

I might just note, in passing, that there is very little reinsurance currently being written in this field. There have been rare instances

Senator PURTELL. There is none available or very little available!
Is that your statement?

Secretary PERKINS. Very little. It is not commonly written. We will come to this fourth point that we are going to rein-ure under this program abnormal losses.

Let us assume that the plan has been approved by the Secretary for reinsurance. After the examination of the actuarial data submitted by the actuaries of the company, a reinsurance premium rate would be agreed upon between the Federal Reinsurance Fund and the carrier. and upon payment of the premium the certificate of reinsurance or the reinsurance contract relating to this particular plan would be issued to the carrier.

It should be noted, as the Secretary pointed out, that this reinsurance contract would apply only to the particular plan applied for. and this carrier might have 10 other health plans outstanding for which it did not desire reinsurance; but in this particular comprehensive plan it might be moving into a new area where it decides it wishes to spread the risk.

The next and most complex question posed by the bill is the actual formula for the reinsurance payment, that is, for this payment here to be made by the Federal Reinsurance Fund in the event of an abnormal loss.

The next chart (M) is designed to illustrate what we mean by an abnormal loss and how the formula actually operates.

The formula is based on a predetermination of the anticipated bere fit payments under the particular plan.

We have illustrated by the left-hand bar how the total premium income of the carrier sponsoring plan X might be distributed.

Now, this anticipated distribution is made in advance by the car rier's actuaries and is reviewed and approved or would be reviewed and approved by the actuaries of the Federal Reinsurance Fund.

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The total bar then represents the total premium income under the Het plan for the year.

In the lower portion of the bar, in the gray, we have indicated the anticipated benefit payments under the plan, that is, the amount that it is expected would actually be paid out to the policyholders for

benefit claims.

In the white we have indicated the amount that the carrier would normally set aside in the year for contingencies and profits if it were a profit carrier.

Then, in the top segment, as indicated, are the anticipated administrative expenses of the carrier; that is, out of its total premium income it will obviously have to allocate a certain portion of it to administrative expenses, and that is the portion indicated on the top.

Now, what do we mean by an abnormal loss?

Clearly, if the actual benefit payments do not exceed the anticipated benefit payments, then the carrier suffered no financial discomfort and no loss.

We have illustrated that instance by the first bar of the three bars
which illustrate actual experience under the plan.

In the first instance, because the actual benefit payments do not
exceed what has been anticipated as a portion of the total premium
income, there would be no reinsurance payment.

Similarly, if the actual benefit payments did not exceed the sum of the anticipated benefit payments, plus contingencies and profits, there would be no reinsurance payment.

In other words, the carrier would be absorbing and taking the risk of the loss of what it had expected for profits for that particular year and for contingencies for that particular year under this plan.

Furthermore, it was concluded that the carrier should absorb a portion, a small portion, of the amount that it anticipated applying to administrative expenses before the reinsurance payment would operate. Under this bill, that amount of applied administrative expenses is one-eighth.

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